Real estate professionals facilitate several parts of the real estate transaction. Whether you’re dealing with commercial real estate or home sales, you’re responsible for a lot. These transactions can also lead to significant liability.
The fact of the matter is you might never have a claim filed against you. Or you might do everything right and still get sued. The best offense is a good defense, and that's what insurance provides. You have it for your house and car; you need it for your business, too.
Here are some of the most common questions and answers about real estate errors and omissions (E&O) insurance.
What Is E&O Insurance & What Does It Cover?
E&O insurance is a type of professional liability insurance that protects professionals—like real estate brokers and agents—from lawsuits claiming they made a mistake in providing services to their clients.
Professional liability insurance can help protect you from the high costs of defending yourself in case of a lawsuit or claim. E&O insurance covers many specialized claims that aren’t covered by traditional liability insurance.
"Brokers need insurance because they can't see everything their agents are doing,” said Khari Washington, broker, Realtor, and mortgage broker with 1st United Realty & Mortgage, Inc. “There is a lot of risk, and it needs to be protected.”
As for agents: If you work for a broker, you might be covered. However, there’s also a chance that you might not be. If you aren’t sure, ask your broker if there is coverage through the firm, and confirm that you are insured each year. Most larger brokerage firms have policies in place and will advise you each year to update your information, provide payment for your share of the premium, and make certificates of insurance (proof of insurance) available to you.
“If the broker doesn't have E&O Insurance, an agent needs to carry it to lessen the risk that a mistake in a transaction financially bankrupts them,” said Washington.
Mistakes Can Happen
Mistakes do happen, even to the best, most diligent professionals. For example, you might inadvertently publish the incorrect square footage for a home you’ve listed. An unhappy buyer might sue over that error. E&O insurance would typically cover the cost of legal proceedings and outcomes.
Such a mistake happened to a real estate professional in California who accidentally listed incorrect square footage of commercial properties. When the buyer found the mistake after the purchase, they realized they would not be able to charge the rent they had expected due to the reduced square footage. A lawsuit against the agent and the broker resulted in a judgment in favor of the buyer of $571,635.
In another case, a hacker sent an email to a broker with wire instructions intended to divert funds from the transaction into the hacker’s account. The broker then forwarded the email with the fraudulent payment instructions to the buyer. Upon receiving the email, the buyer then followed those instructions and, as a result, lost nearly $200,000 by sending it to a fraudulent account. The buyer sued, claiming the broker was negligent for forwarding an email with fraudulent instructions and should reimburse them for their lost money. The court ruled that the broker was “85% responsible” for the loss and required the broker to repay the buyer $167,000.
Accusations of Misrepresentation
Another example of the risks agents and brokers face is from claims arising out of failure to disclose dangerous or undesirable conditions in a home or business. For example, a buyer might discover mold that wasn’t part of the seller’s disclosure form. Even if the mold wasn’t noticed by the inspector or appraiser, the buyer may sue, claiming you neglected to tell them of the potential problem that you knew or should have known about.
Failure to Deliver Services
If you forget to properly perform the services you promised as a real estate agent or broker, —such as paperwork, reports, or repairs—you could be held liable. This is important because the duties of a real estate broker represent diligent and thorough tasks necessary to a problem-proof transaction. Failure to perform those duties properly, when resulting in a transaction gone wrong, will be grounds for negligence claims.
How Much Does E&O Insurance Cost for Brokers & Agents?
The cost of E&O insurance will vary depending on your annual revenue, the types of services you want covered, the amount of coverage you purchase, and the insurance company you choose.
An E&O policy can start at less than $600 a year, but the price will also be determined by a risk analysis that includes things such as:
- Where you work
- How long you have been in business
- Previous claims
What to Consider When Choosing E&O Insurance
E&O insurance policy terms can vary among insurance providers. Each may have its own set of exclusions or conditions.
You will want to make sure that the level of coverage you choose includes appropriate dollar limits for your business’s level of risk. Individual agents and small brokers may need less coverage than large firms or those handling large commercial real estate transactions.
The National Association of Realtors (NAR) suggests you evaluate any insurance carrier and make sure you know the details of your E&O policy, including:
- Who is covered by the policy? For example, are independent contractors and assistants covered?
- What is covered by the policy (and under what conditions)?
- When does coverage begin and end?
- How much coverage is available (limits of liability)?
- What is the deductible, and how is it applied?
- Will you have any control over when to settle a claim?
You want to work with an insurance carrier that provides specific coverage for real estate professional errors and omissions, including items such as:
- Open house or real estate showing coverage
- Coverage for fair housing act claims
- Coverage for failing to disclose pollutants
- Loss of wages (subject to limits) incurred to attend court proceedings or depositions
- Reimbursement (subject to limits) for the cost to defend against disciplinary proceedings
BONUS: 3 Extra FAQs to Consider
What are the most common reasons why real estate agents & brokers get sued?
Real estate transactions typically represent the biggest investments homebuyers will make in their lifetime. If they aren’t happy with the purchase, they can sue for a variety of reasons. Here are the most common reasons why agents and brokers get sued:
- Misrepresentation or fraud
- Breach of duty
- Giving advice outside the scope of their professional license (e.g., legal advice)
- Not protecting client data in their possession
- Bodily injury or property damage
If you’d like to learn more about the most common reasons why agents and brokers get sued (and even read about some real-life case studies), make sure to check out our article “Why Do Real Estate Agents & Brokers Get Sued?”
How can I protect myself from claims?
A good start is to make sure you are well-versed in the NAR Code of Ethics and Standards of Practice and follow them.
As an agent or broker, you have a duty to promote the best interests of your clients at all times. This means putting their needs first, providing and disclosing accurate information, avoiding conflicts of interest, and thoroughly delivering the services you contract to provide.
Eric Nerhood, real estate agent, appraiser, and president of Premier Property Buyers, has two specific pieces of advice for real estate agents and brokers: Document everything and get signatures if your advice is not taken.
- Document everything. “To keep your claims against your E&O to a minimum, keep impeccable notes from every conversation, whether in person or on the phone,” said Nerhood. “You may need something for evidence at a later date.”
- Get signatures. “Make sure you get signatures on documents where your client refuses something that you recommend. If they refused an inspection and the wiring is gone, you are probably off the hook if they signed that they waived the Inspection.”
The NAR also recommends you take a proactive approach to recognize risks in your business and stay up to date on legal changes.
How can I check an insurance company’s license & rating?
When choosing an E&O insurance provider for real estate agents or brokers, the Insurance Information Institute recommends you work only with providers that are licensed (also known as an “admitted carrier”) and financially solid. You should check which companies are licensed to do business in your state.
You should also check an insurance carrier’s financial ratings. This information can be found online, such as:
Note: You may need to register for a free account to access ratings information.
If you are a real estate agent or a real estate broker, you need E&O insurance to protect yourself from claims of professional negligence. Without professional liability insurance, one mistake can lead to expensive consequences that can have a long-lasting and negative impact on your business.
An E&O policy for brokers and agents can help protect you against the financial burden of claims and losses.
Berxi provides E&O insurance for brokers and agents that includes customized deductibles, flexible limits, and qualified payment plans. Part of Berkshire Hathaway Specialty Insurance Company, Berxi provides superior insurance coverage for businesses at affordable prices.
Ready to get a quote? Visit us online at berxi.com or contact us at 855.209.2555 and one of our licensed agents would be happy to help you out.
Image courtesy of iStock.com/Olivier Le Moal